a case for starting or
joining a registered investment
advisory (RIA) firm
A Case for Starting or Joining a Registered Investment Advisory Firm
Important Disclosure
This Report was produced by Charles Schwab & Co, Inc. (“Schwab”) and is intended solely
for investment professionals. The Report is intended for general informational purposes only
and is not intended to provide financial, investment, regulatory compliance, legal or tax advice,
and the information is not tailored to the particular circumstances of any reader of the Report
or their firm. In addition to the sources noted, the Report relies on information provided to
Schwab by the advisory firms and investment professionals that participated in Schwab’s
research and interviews. Schwab did not independently verify that information and Schwab
makes no representations about the accuracy of the information in the Report. In addition, the
experiences and practices of the investment professionals and firms discussed in the Report
may not be representative of others with similar circumstances or the experience or results you
might obtain.
Any mention in the Report of products, services or processes created or offered by anyone
other than Schwab is not, and should not, be construed as a recommendation, endorsement
or sponsorship by Schwab. You must decide whether to purchase or implement these
products, services and processes and their appropriateness for you or your situation.
This Report is not intended for use by investors in evaluating or selecting an investment
advisor or otherwise. The Report relates solely to certain business enterprise management
practices of the participating independent investment advisory firms. The Report and
Schwab’s research did not examine or verify the investment performance and client service
levels of those firms. This Report is not a recommendation or endorsement of, referral to,
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Schwab Advisor Services (formerly Schwab Institutional) is a business segment of The Charles
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trading and support services of Charles Schwab & Co., member SIPC.
Executive Summary
2
Introduction
Based on feedback from hundreds of advisors considering starting or
joining Registered Investment Advisory (RIA) firms, financial advisors
are asking themselves fundamental questions such as:
•What’s the best advisory model for my clients?
•How can I “re-capitalize” personal market-related losses?
•How would I fare without the guidance and infrastructure in my
current environment?
This paper explores some of the options available to advisors who
may be considering a change from their current broker-dealer
environment. It examines:
•“Net” annual compensation in the RIA model as compared to a
captive hybrid or bank/brokerage environment
• Accepting a check (forgivable loan) compared to starting an RIA
•The role of the RIA custodian in regards to service, products,
technology, practice management and protecting assets
•Recent net new asset flow comparisons between RIA custodians
and top brokerages
• Options available to advisors/teams beyond starting their own firms
Find out for yourself what makes a successful move to
independence—and learn from those who did.
Momentum Shift to RIAs
6
Advisor Models to Consider
The Spectrum of Independence
Callan Capital: Taking Control of Your Destiny
What Is the Role of the RIA Custodian?
12
The Economics of Independence
A Reality Check
Increased Earning Potential as an RIA
Comparing a Forgivable Loan With Starting an RIA Firm
20
SOME REASONS Why Advisors
Choose the RIA Model
Taking Control of Your Success
Managing Conflicts of Interest
RIA Firms Are Growing Faster
23
Moving Forward With Independence
Joining an RIA Firm
Burns Wealth Management: Sharing Control of Your Destiny
Start-Up Costs
27
Resources to Ease the Transition
Advisor Conversion Services
28
Conclusion
About Schwab Advisor Services
29
appendix: ENDnotes
1
A Case for Starting or Joining a Registered Investment Advisory Firm
Introduction
The business of providing investment advice has radically changed in recent years. With
affluent clients frustrated by real or perceived conflicts of interest and difficult market
conditions,1 an increasing number of financial advisors see a need to re-earn clients’ trust.2
A move to a different advisory channel can present that opportunity to some.
Those who leave a bank/brokerage firm, wirehouse or independent broker-dealer to
become a Registered Investment Advisor (RIA) often want to improve the service provided
to clients, expand their advice and product offerings, and increase their earnings
potential. Some may be in transition-planning mode trying to determine the best way to
maximize the sale of their revenue stream at a later point in their career. Still others may
be interested in evolving their fee-based practice to fee-only over time and believe the
best channel for this evolution is outside the bank/brokerage channel.
Clients of advisors are often business owners who appreciate doing business with other
business owners. Based on feedback from hundreds of advisors who in recent years
started their own firms or joined existing firms custodying their assets with Schwab
Advisor Services,3 it’s not uncommon for clients to respond “What took you so long?”
when learning that their advisor started or joined an independent firm. What’s more, an
overwhelming 98 percent of independent RIAs say if they had to do it again, they would
make the same decision to go independent.4
“After 16 years in the wirehouse environment, I wanted transparency. When I was with my
prior firm, we used to start every client meeting with an explanation of why we weren’t the
same as the big-name wirehouse on our business card—we were always trying to differentiate
ourselves from the traditional broker. I find it refreshing that today we can talk about our
boutique independent model. We can talk about customization. We can talk about the service
model and why we went down this path in the first place.”
—John Krambeer, President and CEO, Camden Capital Management
2
Introduction
Momentum Shift to RIAs
The recent financial crisis and massive firm
consolidations have prompted investors to
question advisors about the stability of
major Wall Street firms that are holding
their assets.5 While this crisis of confidence
led many previously happy advisors to
actively research becoming independent
advisors, the stage began to be set for this
exodus nearly a decade ago. Since the
early 2000s, Schwab Advisor Services
believes, many traditional wirehouses may
have unintentionally created a fertile
environment for the next generation of
independent advisors.
Team building
To begin with, many wirehouses transitioned
from simply accommodating advisors who
wanted to team up, to encouraging them to
partner in order to better serve clients and
ensure continuity when a team member
leaves the firm.6 In this environment, a fully
functional and compatible team that
becomes unhappy with its firm wields a
significant amount of leverage. Advisors who
have branded their team within the construct
of the wirehouse have already created a
boutique atmosphere similar to independent
practices, and are similar in nature to the
RIA model.7
“Certain individuals and teams have evolved
their own boutique business model. They
need a more focused solution.”
—George Dunn, Managing Director
Convergent Wealth Advisors
Institutional Group
An emphasis on fee-based business
Traditional wirehouses have also encouraged
the growth of fee-based accounts in the past
decade in order to annuitize revenue flows
and manage shareholder expectations from
quarter to quarter. For example, the 2007
Focus on Growth bonus program provided
Merrill Lynch financial consultants an
incentive to grow their fee-based business.8
Advisors with 80 percent to 100 percent
fee-based client assets under management
are increasingly realizing that “haircuts” on
these assets by wirehouses can be avoided
by going independent. This emphasis on
fee-based accounts underscores an
increasing awareness of how RIA custodians
are compensated (see page 11). Those
advisors with a more balanced mix of fee
and commission business may often value
the oversight and support of an independent
broker-dealer on an ongoing basis.
Consolidation
Combinations of major banks and brokerages
in 2008 and 2009 haven’t inspired a sense of
stability for clients or advisors.9 Merging
cultures, integrating products/platforms and
reducing expenses may heighten uncertainty.
3
A Case for Starting or Joining a Registered Investment Advisory Firm
Advisors may feel disenfranchised by the
retention packages they are offered (or not
offered), the treatment of team members in
retention package calculations, the changes
in leadership, and the rumored or actual
compensation plan changes. These advisors
may be challenging their firms to work to
retain them by actively and sometimes
openly pursuing other options like going
independent.10 Ultimately, many advisors are
not in control of their or their clients’ destinies.
A crisis point
The sub-prime and credit crises continue
to be a major source of client and advisor
frustration. As such, many advisors and
teams have considered a fresh start by
accepting a forgivable loan offer from a
competing firm.11 Others, who have looked
carefully at the math and weighed the
multi-year commitment required as part of
the loan (see Exhibit 8: Comparing a
Forgivable Loan With Starting an RIA Firm on
p. 18), have opted to consider monetizing
their revenue by starting an RIA instead.
With an increase in disgruntled advisors and
with more conservative banking cultures
increasingly influencing recruiting policy,
there is a growing school of thought that
forgivable loan amounts will trend down from
the heights reached in 2007 and 2008.12
On the other hand, an emerging emphasis
for those seeking independence is building
equity in a business without depending on
colleagues with different incentives.13
4
“On August 8, 2008, everyone in The Courage
Group left the safety net of working for a large,
bank-owned, international wealth management
firm and moved several blocks down the street
to open our doors as Courage Partners, LLC.
We left without being able to notify our clients
in advance, our new space was not ready, the
phones were not working properly, the furniture
had not arrived, our former firm was not helpful
and, a month later, the equity markets began
the historic ‘waterfall event.’ We quickly learned
that an 80-hour workweek would be a
vacation—and how to survive on energy bars
and bottled water. Five months later, our clients
appreciate how we came to our decision and
understand why our move to independence
benefits them. We have been overwhelmed by
the incredible affirmations our clients have
given us and are even more determined in our
dedication to serve them. I am so pleased and
thankful to report that nearly all our clients,
including all of our major clients, have followed
us to Courage Partners, which is even larger
than it was when we declared independence.”
—Ralph Courage, Managing Member
Courage Partners, LLC
The experience of Ralph Courage and Courage Partners
may not be representative of the experience of others
and is not a guarantee of future performance or success.
Introduction
EXHIBIT 1: SCHWAB ADVISOR SERVICES NET NEW
ASSETS FROM ADVISORS TURNING INDEPENDENT
Convergence in thinking
Thousands of successful fee-based teams
and individuals are now in a position to
consider starting or joining RIAs. The
Broker Protocol created in 2004 by some
of the major wirehouses attempts to avoid
costly lawsuits and Temporary Restraining
Orders (TROs) against departing financial
advisors. If an advisor resigns, takes
limited client information outlined in the
Protocol and joins another member firm,
the Protocol may shield them from a
lawsuit or TRO. Since its inception, many
RIAs have also joined the Protocol,
enabling them to take advantage of the
protection it originally afforded wirehouses.
Assets under management (AUM in billions)
$14
$13.2
12
nt
10
8:
5
8
GR
CA
’0
58
0
–’
ce
er
p
$9.2
$6.9
6
4
$3.3
2
0
2005
2006
2007
2008
Source: Schwab Advisor Services
Schwab Advisor Services’ 58 percent compound annual growth
rate (CAGR) in net new assets from advisors who recently
became independent is another reflection of the trend of
turning independent. Exhibit 1 (above) tracks advisors/teams
leaving a bank/brokerage firm or independent broker-dealer
to start or join an RIA.
5
A Case for Starting or Joining a Registered Investment Advisory Firm
ADVISOR MODELS
TO CONSIDER
The Spectrum of Independence
If you want to go independent, you have three basic models from which to choose:
•Pure RIA: Start or join a 100 percent fee-based RIA, using independent RIA custodians.
•Open hybrid model: Start or join a fee-based RIA while affiliating with an independent
broker-dealer for transaction business, including on-going commissions and trailers.
•Captive hybrid model: Affiliate with a broker-dealer with a corporate RIA and restrictions on
RIA custodian access.
The choice of models typically depends on the type of revenues the independent advisor
earns: Fee-only advisors may find the pure RIA model the most attractive. Advisors who
choose to retain some or all of their commissions usually affiliate with a broker-dealer in
what many describe as a hybrid model. Schwab Advisor Services provides custodial services
to about 1,500 RIAs that have principals or other personnel who have licenses with
independent broker-dealers.
In good company
Some independent broker-dealers require associated broker representatives to use their
corporate RIA or otherwise restrict them from accessing independent custody and trading
platforms for their fee-based business like those offered by Schwab Advisor Services. Other
independent broker-dealers, who work with RIA custodians, have embraced a multi-affiliation
model that allows their associated brokers’ firms to set up their own RIAs and choose the
best platform for their clients.14
Still, it is becoming more common for individuals and teams to join as employees or forge
a strategic alliance with an existing independent RIA rather than start their own. In fact,
an increasing number of RIAs are hungry to grow by adding advisors and/or teams, either
through recruitment or acquisition.15
Firms specializing in ownership transactions offer an attractive option as well for those
seeking specific transition assistance and various degrees of operational and practice
management support. Whether as a boutique or a holding company, a handful of investment
consulting companies allow an advisor/team to receive up-front compensation in return for
a portion of the future revenue stream.
6
CALLAN CAPITAL: TAKING CONTROL OF YOUR DESTINY
“Schwab was integral in introducing us to vendors and helping us narrow our search for everything
from IT to performance monitoring to financial planning software. The Schwab conversion team was
critical in transferring the accounts of clients who followed us. We chose Schwab Advisor Services
because of its brand. They’ve been in the business of custodying RIA assets much longer than
anyone else.”
—Trevor Callan, CIMA and CEO, Callan Capital , LLC
The experience of Trevor Callan and Callan Capital may not be representative of the experience of others and is not a guarantee of future
performance or success.
As Trevor Callan—CIMA and CEO of Callan Capital, LLC in La Jolla, CA—stops for a minute in his office overlooking
the Pacific Ocean, he’s reminded of all the hard work it took to get here. He and his brothers, Tim and Ryan,
conceived the idea of just such a perch as early as 1994. They manage more than $150 million in client assets
from this chic, state-of-the-art office—part California modern, part fast-paced consulting firm and part yesteryear’s
Wall Street bullpen. One can’t help but feel the Callan Brothers are finally where they always wanted to be—in
control of their own destiny.
What was once a lofty goal became reality in January 2007, when the Callan team left its former wirehouse firm to
start Callan Capital. There were many reasons for this move. For starters, the Callans wanted to provide true open
architecture for their clients. “We spent a lot of time at our former firm talking about open architecture, but in reality
we were confined to our firm’s platform,” says Trevor. “Schwab doesn’t confine us to its platform. Working with a
custodian allows us choices we didn’t have before.”
Trevor’s team members also wanted more control over their compensation, which they felt should be tied to their
interests rather than the interests of shareholders of the company employing them. The idea of creating wealth by
owning the firm themselves appealed to them immensely.
“One of the toughest things in our former environment was staying aligned with the critical firm objectives each
year,” Trevor recalls. “For example, we wanted to market ourselves as a team. Yet that wasn’t necessarily what the
firm wanted to see happen. We found ourselves stagnating. We’d come up with a great marketing technique, but by
the time we got the go-ahead the opportunity had come and gone. So we became resistant to thinking outside the
box because we were constantly going through hoops to get our initiatives approved.”
As an elite team focused on high-net-worth clients, the Callans knew their decision to leave the firm wouldn’t go
unnoticed. “The legal issues were the scariest part of the whole process,” he explains. “There are many decisions to
make when leaving a wirehouse. We opted to be very conservative and walked out, literally, with only our pencils. As it
turned out, such an exit drew zero legal implications.”
7
A Case for Starting or Joining a Registered Investment Advisory Firm
What Is the Role of the
RIA Custodian?
RIA custodians do much more than hold
client assets. Schwab Advisor Services, for
instance, provides various levels of product,
business management, technology and
service support to client firms. Unlike some
independent broker-dealer models, RIA
custodians view advisors as clients—rather
than supervised agents. As such, advisors
can freely move among custodians and use
services as they wish.
Service
Though the day-to-day service provided by
custodians is usually invisible to the
advisor’s clients, the level of service an
independent advisory firm provides to its
clients is integrally linked to its custodians.
EXHIBIT 2: NET PROMOTER® SCORE
50
Schwab
40
+47
30
20
10
0
-6
-11
TD
Ameritrade Fidelity
-10
-20
-30
Base
(533)
(274)
(219)
-30
Pershing
(111)
Source: Abt SRBI of New York City, June 2008
8
Based on Schwab Advisor Services’ more
than 20 years of experience, the opportunity
to work closely with a small group of service
representatives is often cited as a key
advantage of the custodian model.16
“We have come to know a small group
of very capable service representatives.
Schwab helped us unlearn our old notion of
what a service team means. We have found
many friends with Schwab who understand
what it means to be best-in-class.”
—Felipe Luna, President, Wealth Management
Concert Global, LLC
The experience of Felipe Luna and Concert Global, LLC
may not be representative of the experience of others
and is not a guarantee of future performance or success.
Since custodial services are so important
to the newly independent RIA, your selection
of a custodial team is an important choice.
The Net Promoter Score, generated by a
study in June 2008 by Abt SRBI of New York
City, measures satisfaction with products
and services offered by custodians.
The survey results cited in Exhibit 2 involved
1,000 RIAs managing more than $10
million as reported in ADV filings at the time
of the study. Schwab Advisor Services was
not identified as the survey sponsor.
Here’s how it worked:
1. The 1,000 RIAs were asked how likely
they would be to recommend each custodian
ADVISOR MODELS TO CONSIDER
Exhibit 3: Technology relationship
they use to other investment advisors on a
scale from 0 to 10, where 0 is “not at all
likely” and 10 is “extremely likely.”
EXHIBIT 4: TECHNOLOGY RELATIONSHIP
Custodial
System
2. The Net Promoter Score is the difference
between the percentage of “Promoters”
(who responded 9 or 10) and “Detractors”
(6 or below).17
Broad product offering
Leading custodians have spent decades
developing their investment product offerings
based on the needs of their clients. Charles
Schwab & Co., for example, is the fifth
largest provider of managed accounts in
the U.S., with more than 2,300 managers
available through its platform.18 Advisors
working with RIA custodians are not
constrained by the mandates of a central
investment selection committee and thus
can more freely select the products they feel
are best suited for their clients—which
means they can also establish additional
custodian relationships to access products
their “primary” custodian does not offer.
Advisor
Customer
Relationship
Management
Portfolio
Management
Exhibit 3 shows a common framework from which advisory
firms can operate. Similar to product availability, RIA firms have
the freedom to select their own technology through an open
architecture environment. Advisory firms manage technology
needs either internally or through a hosted solution managed by
a third party.
Most RIA custodians provide a trading platform and rebalancing
functionality through a proprietary portal that integrates with
“I was surprised to find that we have access
to just about every broker-dealer’s research,
since we have accounts with most of the
major firms.”
a portfolio management system and a customer relationship
management system. Advisors often integrate financial
planning, research/newswires and other options as well.
—Trevor Callan, CIMA, CEO
Callan Capital, LLC
The experience of Trevor Callan and Callan Capital, LLC
may not be representative of the experience of others
and is not a guarantee of future performance or success.
9
A Case for Starting or Joining a Registered Investment Advisory Firm
EXHIBIT 5: SCHWAB PERFORMANCE TECHNOLOGIES
Exhibit 4: Schwab performance Technologies
Portfolio Data
Performance
Management
Reporting
Get consolidated
Receive professional
client data from
quarterly presentations
thousands of financial
to share with
institutions, along
your clients that
with management
demonstrate the
of reconciliations,
value you provide.
nightly backups
PortfolioServices
and maintenance.
Client Billing
Generate client billing statements electronically
and get help with uploading fees for
Schwab accounts and calculating
management fees.
In the last few years, RIA custodians have simplified technology
for newly independent advisors by offering integrated solutions.
Schwab owns Performance Technologies’ PortfolioCenter,
one of the two leading providers of portfolio management
services—which reinforces the importance of working through
an open architecture platform.19 Schwab PortfolioServices™
is a full-service back-office offering that helps firms manage
critical business activities, including generating professional
reports and billing clients. Exhibit 4 (above) summarizes the
PortfolioServices offering.
PortfolioCenter and PortfolioServices are products of Schwab Performance
Technologies (“SPT”), a part of Schwab Advisor Services. Schwab Advisor
Services is a business segment of The Charles Schwab Corporation and
includes the custody, trading and support services of Charles Schwab and
Co., Inc., a registered broker-dealer and member SIPC, as well as the portfolio
management and accounting solutions of SPT. CS&Co and SPT are separate
subsidiaries of The Charles Schwab Corporation.
10
For many advisors, technology customization
is key. Custodian platforms are often set up
to be configurable to any number of outside
technology solutions. Independent advisors
choose the best solutions based on their
unique needs.
Practice management support
on the advisors’ terms
An advisor or team that forms or joins an
independent RIA firm that custodies assets
with an RIA custodian are not employees or
representatives of, and don’t work for, the
custodian. That means that they don’t receive
a “payout” from the custodian.20 So there are
no branch managers imposing production and
growth demands. But growth is often still a
priority for the RIA. As firms grow larger, their
needs often become more complex. Some RIA
custodians offer dedicated teams to provide
business management guidance for client
firms, which advisors can choose to access.
Schwab’s Business Consulting Services group
has significant experience helping firms of all
sizes, including most of the 55 firms with
more than $1 billion held on the Schwab
custody platform as of December 2008.
ADVISOR MODELS TO CONSIDER
“In our opinion, the technology, support and
menu of investment choices available for
our clients are vastly superior in almost every
way to our old brokerage firm platform. But
most importantly, we have been impressed
daily with the culture and commitment to
excellence.”
—Ralph Courage, Managing Member
Courage Partners, LLC
The experience of Ralph Courage and Courage Partners,
LLC may not be representative of the experience of others
and is not a guarantee of future performance or success.
How does the custodian make money?
So how is a custodian compensated
for providing the brokerage, custody,
technology and practice management
support just described? Generally, the
custodian, which is also a broker-dealer,
is compensated through brokerage
commissions, or asset-based fees in lieu
of commissions, and other fees paid by
the RIA’s clients whose accounts are held
by the custodian. As we discuss in the next
section, owners of what was previously
described as a pure RIA firm set their own
fees and their own fee structure.
proprietary mutual funds and managed
accounts. Some custodians provide valueadded services to the advisory firm for a
fee, typically portfolio accounting systems
and certain back-office functions.
Many new RIAs charge their clients assetbased wrap fees—similar to the wirehouse
model, in which the client pays a single fee
for both investment advice and trade
execution. In this model, the RIA typically
pays the custodian for its brokerage and
other services on an asset-based schedule.21
RIA firms that pass transaction costs onto
clients keep 100 percent of the revenue
earned from client fees.
Schwab Advisor Services’ primary revenue
sources are transaction revenue (e.g.
commissions for trades) from client
brokerage accounts, asset-based fees (e.g.
fees from mutual fund companies based on
fund shares held in customer brokerage
accounts) and asset management fees from
investment products such as Schwab
11
A Case for Starting or Joining a Registered Investment Advisory Firm
THE ECONOMICS
OF INDEPENDENCE
A Reality Check
To help you evaluate the financial
implications of going independent, consider
that prior to the creation of Morgan Stanley
Smith Barney it was possible, though
unlikely, for a wirehouse to reach a payout of
58 percent.22 More commonly, the traditional
wirehouse advisor earns 25 percent to 45
percent of the fees paid by clients.23 Banks,
meanwhile, often pay advisors a salary plus
30 percent to 40 percent of the base salary
as a bonus.24
Yet these additional administrative fees
create an even lower effective payout.
Tiered administrative fees based on
account size can penalize advisors with
smaller client accounts, resulting in an
effective payout between 70 and 90
percent. A typical income statement for an
advisor associated with an independent
broker-dealer (IBD) breaks down as follows:
Gross Dealer Concession
– Wirehouse Support Costs
Gross Payout
Eligible Revenues
– IBD Support Cost
– Administrative Fees
Effective Payout
– Out-of-pocket Advisor Expenses
Net Payout
– Overhead Expenses
IBD Advisor’s Income + Profit (Loss)
Captive independent broker-dealers may
capitalize on the “payout” vernacular by
promoting payouts as high as 98 percent25
for top producers, but the term “payout” can
be misleading. In practice, a distribution of
88 percent to 90 percent before accounting
for overhead expenses is more common,
with bonuses sometimes offered as an
incentive to grow.26 By combining the bonus
incentive and the 88 percent to 90 percent,
an advisor/team can theoretically reach the
headline distribution of 98 percent of
12
revenues, again before accounting for
administrative fees and overhead expenses.
After paying the independent broker-dealer
for shared support services, the overhead
expenses are often higher than in the RIA
model, largely due to paying for support
services whether they are needed or not.27
THE ECONOMICS OF INDEPENDENCE
Increased Earning
Potential as an RIA
Advisors participating in the Schwab Advisor
Services 2007 RIA Benchmarking Study
reported that top firms earn 69 percent to
73 percent net compensation, or Owners’
Income + Profit, in the RIA model.28 In other
words, by managing expenses aggressively,
an RIA firm can maintain a 27 percent to
31 percent overhead expense rate, leaving
the remainder for principal draws, nonadministrative professional salaries and
investment in the firm. This compares quite
favorably to other compensation models.
Exhibit 5: Schwab 2007 RIA Benchmarking
Study Results—Overhead Expense—Top Firms*
Assets Under Management
($MM)
Gross Revenues (%)
– Overhead Expense (%)
Owners’ Income + Profit
25–
100
100–
250
250–
500
500+
100%
100%
100%
100%
30.5%
28.8%
29.4%
26.7%
69.5%
71.2%
70.6%
73.3%
*The top 20th percentile of results are shown for participating firms with the lowest
“Overhead Expenses,” which consist of all expenses other than principal draws
and non-owner professional salaries (also called non-administrative professional
salaries). This information is general in nature and limited. It is provided for
illustrative purposes only and may not be representative of the experience of others.
It is not a guarantee of future performance or success.31 The results of the 2009
RIA Benchmarking Study were not available at the time of printing.
A simplified income statement for a pure
RIA firm follows. Note that managed
account manager fees are netted out
of Gross Revenues.
Gross Revenues
– Overhead Expenses
RIA Owners’ Income + Profit (Loss)
Monetizing the RIA asset
In addition to potentially earning more net
income, independent advisors can build
equity and create a transferable asset with
significant enterprise value. Buyers typically
value RIAs at between 6 and 10 times
cash flow,29 or between 1.8 and 3.5 times
revenues, with the largest multiples usually
applied to teams with $500 million or more
of fee-based assets.30
Exhibit 6: Schwab 2007 RIA Benchmarking
Study Results—Overhead Expense—Medians*
Assets Under Management
($MM)
Gross Revenues (%)
– Overhead Expense (%)
Owners’ Income + Profit
25–
100
100–
250
250–
500
500+
100%
100%
100%
100%
39.0%
36.3%
37.0%
34.5%
61.0%
63.7%
63.0%
65.5%
*The median results are shown for “Overhead Expenses,” which consist of all
expenses other than principal draws and non-owner professional salaries (also
called non-administrative professional salaries). This information is general
in nature and limited. It is provided for illustrative purposes only and may not
be representative of the experience of others. It is not a guarantee of future
performance or success.31 The results of the 2009 RIA Benchmarking Study were
not available at the time of printing.
13
A Case for Starting or Joining a Registered Investment Advisory Firm
EXHIBIT 7: MERGERS & ACQUISITIONS OF RIA FIRMS
Total assets under management (AUM) acquired, in billions
$140
$134
120
.
55
8:
100
80
GR
CA
60
’04
nt
rce
e
4p
$101
– ’0
$56
$54
2005
2006
40
20
$23
allow an advisor to earn additional income
in retirement by passing his book of
business on to a teammate in his/her
firm.33 These sunset programs may restrict
advisors to sharing clients with a limited
pool of other advisors. Further, future
revenue streams generated by the retiring
advisor may be taxed as ordinary income.
Finally, continuity payments are often
remitted over five years, diminishing the
real returns.34
0
2004
2007
2008
Source: Schwab Advisor Services Strategy Group
According to statistics tracked by Schwab Advisor Services,
the compound annual growth rate of total assets under
management acquired from 2004 – 2008 was 55.4%.
Many factors contribute to valuation
modeling, including, but not limited to,
assets under management, revenues,
growth, book composition, percentage of
assets that are fee-based, net operating
profits, profit margin and involvement of
rainmakers in the future. In 2008, $134
billion in industry-wide RIA assets changed
hands, up from $101 billion in 2007.32
Bank/Brokerage Firm Continuity Programs
Wirehouse firms often want to encourage
successful advisors to stay with the firm
until retirement. For this reason, some have
created retirement continuity plans that
14
Potential business-expense advantages
As an independent business owner, you run
business expenses through your practice.
If you typically pay for seminars, meals or
client-appreciation events using after-tax
dollars, setting up an independent business
may have pre-tax benefits.35
FORGIVABLE LOANS FROM WIREHOUSES OR CAPTIVE
BROKER-DEALER FIRMS
—By Tom Giachetti and Henry Van Blunk, partners with the legal firm of Stark & Stark
At first blush, a forgivable loan from a wirehouse or independent broker-dealer firm can look
attractive. For advisors considering moving to another large financial institution, consider the
downside to forgivable loans:
• T he transitioning advisor/team often faces penalties in terms of lost deferred compensation and/or option
vesting if asset or revenue goals are not reached within strict deadlines. With market volatility being what it is,
reaching these goals can sometimes be out of the advisors’ control.
• Incentive packages usually include cash and stock, yet as an employee there are limitations to influencing the stock price.
• T he loan forgiveness is treated as ordinary income from a tax perspective and taxed at the advisor’s income tax rate.
The percentage of tax paid on the loan forgiveness is significantly higher than the percentage paid when selling an RIA.
• The new firm and its shareholders share the profit; the transitioning advisor/team takes the risk.
Sale of your RIA practice
Consider that the owner(s) of an independent RIA choosing to sell a business seven to nine years after inception may
earn more than if they had accepted a forgivable loan at the beginning of that time period. See the hypothetical case
study illustrated in Exhibits 8, 9 and 10 for further potential tax implications. In this example, the earnings are packaged
differently in that the advisor/team didn’t have to commit to the custodian for seven to nine years to earn them.
The sale of an RIA will either be a Stock/Membership Interest Sale or an Asset Sale. In a Stock/Membership
Interest Sale, the shareholders/members are selling their shares/membership interest and pay capital gains tax on
the difference between the tax basis of the shares/membership interest and the sale price of the stock. The longterm capital gains tax rate was 15 percent as of June 2009. In an Asset Sale, a large portion of the purchase price
is allocated to “Goodwill,” which is taxed as a capital gain.
Also consider the possibility that the owner dies during the nine-year period. The owner’s family inherits the shares/
membership interest and their tax basis is equal to the fair market value of the shares at the date of death. If they
immediately sell the shares of the RIA for a lump sum, they pay no capital gains tax. Even if the sale were to require
a portion of the purchase price to be paid over time with interest accruing on the unpaid balance, the family would
only pay ordinary income tax on the interest portion of the payments.
Holding Companies
Finally, if you feel compelled to monetize your revenue stream in the immediate future rather than after existing as an
RIA for a number of years, you might consider speaking with a representative of a holding company—a firm specializing
in consolidating RIAs. Holding companies often offer solutions similar to forgivable loans when helping an advisor/
team start or join an RIA.
The services and opinions of Stark & Stark and Mssrs. Giachetti and Van Blunk are independent of Schwab. Schwab
does not provide tax or legal advice. The taxes discussed are federal taxes only, not state taxes, and the reader is
advised to consult with a tax professional. This information is general in nature and limited. It is for illustrative purposes
only and may not be representative of your circumstances.
15
A Case for Starting or Joining a Registered Investment Advisory Firm
GLOSSARY
An “Unforgiving” Loan
On the following pages, you will find a
series of charts: Exhibit 8: Comparing
a Forgivable Loan With Starting an RIA
Firm; Exhibit 9: Sample Annual Income
Simulation; and Exhibit 10: Sale of RIA
Firm or Acceptance of Bank/Brokerage
Continuity Program Offering. At right
you’ll find a glossary of terms used in
the exhibits.
T-12
Trailing 12-month revenue at Bank/Brokerage Firm
RIA Overhead Expenses
Cost of running day-to-day operations. Does not include
principal draws or non-administrative professional salaries
Override + Out-of-pocket expenses
Incumbent firm’s allocation for profit and overhead
RIA Enterprise Value
Amount firm may be worth if sold
Bank/Brokerage Firm Continuity Program
Allows retiring advisor to transfer his or her book in return
for revenue stream
Net Present Value (NPV)
Difference between the present value of cash inflows
and cash outflows
Owners’ Income + Profit
Includes the salaries and benefits owners pay themselves
plus the profit after paying all Non-Owner salaries and
Overhead Expenses. Typically, non-owner professional
salaries are considered a Direct Expense and therefore are
paid in addition to Overhead Expenses. Administrative staff
salaries are part of Overhead Expenses.
16
THE ECONOMICS OF INDEPENDENCE
Assumptions
The following assumptions were made to
develop the results shown in Exhibits 8, 9
and 10. Associated footnotes, noted with
asterisks, can be found on p. 19.
•Gross revenue or trailing 12-month
revenue for the hypothetical firm in the
illustration is $1,600,000.
•Ninety percent of the assets and revenue
follow the advisor/team after starting the
new independent RIA.
•Revenues grow 23.1 percent in the
RIA model versus 9.8 percent in the
wirehouse or regional firm model.*
•Hypothetical advisor or team is
considering accepting a 9-year forgivable
loan from a competing wirehouse, with an
up-front payment of 125 percent and a
back-end payment of 75 percent of trailing
12-month gross revenue.
•When it comes to monetizing the asset, a
factor of 2.5X revenue has been applied
to the projected gross revenue for the RIA
firm in year 9. The equivalent comparison
point in the bank/brokerage firm model is
the firm’s continuity program. A payment
of 100 percent of gross production for
year 9 is factored into the model based
on a five-year payment plan.**
•The tax consequences reflected in the
Exhibits were reviewed by Tom Giachetti
and Henry Van Blunk of Stark & Stark,
Attorneys at Law. Their views are
independent of Schwab. Schwab does not
provide tax or legal advice. The following
assumptions were made: a Stock/
Membership Interest Sale in the RIA
Model; a capital gains tax rate of 15%;
and ordinary income tax rate of 35%.
•Non-owners’ salaries + Overhead Expenses
are assumed to be 35 percent in the RIA
model, while the override (wirehouse or
regional firm haircut plus out-of-pocket
expenses paid by the advisor/team) is
assumed to be 55 percent.
While Schwab believes the foregoing assumptions are reasonable, it can give no assurance about their accuracy. The assumptions may or
may not reflect your circumstances.
No portion of the above discussion should be construed as legal advice and/or appropriate for any specific firm’s circumstances. Mssrs.
Giachetti and Van Blunk are not making any representation and/or recommendation that a Stock/Membership Interest Sale is a preferred
sale model. Rather each RIA should consult with professionals to determine what is best for its particular circumstances.
17
A Case for Starting or Joining a Registered Investment Advisory Firm
EXHIBIT 8: COMPARING A FORGIVABLE LOAN WITH STARTING AN RIA FIRM
Starting an RIA and selling it in nine years* can be lucrative compared with accepting a
forgivable loan and fulfilling a multi-year commitment.
TOTAL CASH COMPENSATION
RIA Model
Bank/Brokerage Firm
RIA Model
Gross Revenue
Non-owners’ salaries + Overhead
$30,531,371
$9,729,170
Year 1
$1,440,000
($504,000)
Owners’ Income + Profit
$936,000
Start-Up Expenses (sunk costs)
($102,606)
RIA Owners’ Income + Profit Adjusted
$833,394
Income Taxes
($291,688)
RIA Owners’ Income + Profit After-Tax Net
$541,706
Includes sale of practice/book in the RIA
Model and transition of practice/book
through a continuity program in the
Bank/Brokerage Firm Model
Year 2
Year 8
Year 9
$1,772,640
$6,168,348
$7,593,236
($2,158,922)
($2,657,633)
$1,152,216
$4,009,426
$4,935,604
$0
$0
$0
($620,424)
$1,152,216
($403,276)
$748,940
$4,009,426
$4,935,604
($1,403,299)
($1,727,461)
$2,606,127
Monetized Book Value**
$18,983,091
Capital Gains Tax
Bank/Brokerage Firm Model
Gross Revenue
Override + Out-of-pocket expenses
Operating Pre-Tax Net (Income + Profit)
$16,135,627
$30,531,371
Year 1
Year 2
Year 8
Year 9
$1,440,000
$1,581,120
$2,770,632
$3,042,154
($792,000)
($869,616)
($1,523,848)
($1,673,185)
$648,000
$711,504
$1,246,784
$1,368,969
$2,000,000
$0
$0
$1,200,000
Pre-Tax Net (Income + Profit)
$2,648,000
$711,504
$1,246,784
$2,568,969
Income Taxes (forgivable loan)
Bank/Brokerage Firm Advisor/Team After-Tax Net
($226,800)
($249,026)
($436,375)
($479,139)
($77,778)
($77,778)
($77,778)
($497,778)
$2,343,422
$384,700
$732,632
$1,592,052
Continuity Program (Monetized Book Value NPV)**
$3,042,154
Income Tax
($1,064,754)
Net Proceeds After-Tax
Total Net Proceeds After-Tax
Years 1 – 9
$1,977,400
$9,729,170
B
A+B
Forgivable Loan
Income Taxes (earnings)
A
($2,847,464)
Net Proceeds After-Tax
Total Net Proceeds After-Tax
$3,208,142
C
Years 1 – 9
D
C+D
The defaults on Exhibit 8 are illustrative only and are not meant to be recommendations or endorsements of how terms of an agreement should be
negotiated, nor does this Exhibit represent a guarantee of future performance. Actual experience may vary.
18
THE ECONOMICS OF INDEPENDENCE
EXHIBIT 9: SAMPLE ANNUAL INCOME SIMULATION
$3,500,000
EXHIBIT 10: SALE OF RIA
FIRM OR ACCEPTANCE
OF BANK/BROKERAGE
CONTINUITY PROGRAM
OFFERING
RIA Owners’ Income + Profit (After-Tax Net )
Bank/Brokerage Firm Advisor/Team After-Tax Net
3,000,000
2,500,000
$20,000,000
$16,135,627
2,000,000
15,000,000
1,500,000
10,000,000
1,000,000
5,000,000
500,000
0
1
2
3
4
5
Years
6
7
8
9
Net
After-Tax
Proceeds
From Sale
of RIA
Net
After-Tax
Proceeds
From
Continuity
Program
$1,977,400
0
Year 9 Sale
*The duration of forgivable loans typically runs from seven to nine years. As a proxy, assets under management compound annual growth rate
from 2002 to 2006 was 9.8 percent for wirehouses, 12 percent for RIAs and 23.1 percent for Schwab Advisor Services RIAs. Source: Wirehouse
Assets & RIA Assets: Cerulli Associations; RIA Assets at Schwab Advisor Services; Schwab Strategy Group. Past performance is no guarantee of
future results. Using a growth rate of 9.8 percent in the RIA model results in a Total Net Proceeds value of $14,590,440.
**Monetized Book Value goes by many names29, 30 including “Terminal Value” and “Enterprise Value.” This is what your business may be worth.
While it is common to use discounted cash flows to determine the value of a practice, we chose to use a multiple of revenues to simplify the model.
A firm’s value is ultimately determined based on many factors including the stability of the cash flow and market conditions. It is reasonable to use
a factor between 1.8 and 2.6 times revenue for firms with $100 million and up in assets under management, while firms with $500 million and
up may warrant a multiple between 2.75 and 3.5 times revenue.30 The equivalent in the wirehouse space is a firm’s continuity program offered to
retiring advisors. A few of the programs now reach 200 percent of Trailing-12 (equivalent of “2.0” for this Exhibit), usually paid over a 5-year period
for the most tenured advisors. We spread the continuity program compensation over a 5-year period using 35 percent times the final year (9), Gross
Revenue for Year 1, 25 percent for Year 2, 15 percent for Year 3 and 12.5 percent for Years 4 and 5 (for a total of 100% or one times revenue).
Evaluating the Net Present Value (NPV) of the Total Cash Compensation displayed in Exhibits 8, 9 and 10 may help you evaluate whether to start an RIA
firm or to accept a forgivable loan. Using a 15 percent discount rate, the NPV results are as follows: RIA model: $10,877,100. Bank/Brokerage model:
$4,756,571 (after discounting the 5-year continuity payment at 15 percent as well). At a 9.8% growth rate, the NPV of the Total Cash Compensation in
the RIA model is $5,764,811.
The material in Exhibits 8, 9 and 10 is provided for illustrative purposes only and does not represent an actual case. It does not represent a
guarantee of future performance. Actual experience may vary. Exhibits 8, 9 and 10 are not intended to provide specific financial, tax, compliance or
legal advice. You should consult professional advisors in these fields.
19
SOME REASONS WHY Advisors
choose tHE RIA MODEL
Taking Control of Your Success
Serving clients and increasing net income are two of the key reasons advisors choose the
RIA model. In the Recently Independent Advisor Study conducted for Schwab by Koski Research
(concluded October 3, 2008), 62 percent of the participating advisors stated the desire to
provide more personalized service as a determining factor for starting their own independent
fee-based firm. Sixty-two percent also cited the opportunity for greater long-term financial
success. But there are additional reasons to start or join an RIA. According to the study,
75 percent of advisors cite a preference for working for themselves.
Overcoming discontent
The recent proliferation of bank/brokerage mergers and acquisitions, has created an
atmosphere of palpable uncertainty for many advisors. Retention offers from wirehouses may
have further exacerbated dissension because the firms making the transition package offers
may have determined eligibility by the individual’s production level rather than the team’s.
Fueling the fire, at least one major wirehouse has moved to eliminate vertical teams, which
previously allowed groups of advisors to earn a higher collective payout.36 Further, team
leaders often don’t have control over the hiring of staff in the bank/brokerage model. The
independent broker-dealer and RIA models afford the owner the option to decide whether to
hire staff and whom to hire.
As more and more successful advisors find that they can do just as well or better for clients
without the affiliation of a major firm—and that the firm may actually be holding them back by
limiting the way they do business—independence is becoming increasingly attractive.
20
Some Reasons Why Advisors Choose the RIA Model
Managing Conflicts of Interest
Advisors often decide that a great way to
offer objective financial advice is to start an
independent firm where they charge assetbased fees rather than commissions and
define the products and solutions they offer
their clients without the proprietary
constraints. “For me, [going independent]
was all about developing an environment
in which we could act in the best interests
of the client using a fiduciary standard of
care,” says David Bromelkamp, president
and CEO of Allodium Investment
Consultants. “We felt like we had to do
this in order to really take care of our
clients and act in their best interests.”
RIAs are required to disclose potential
conflicts of interest in their Form ADV, which
they must deliver to clients at the start of
the relationship.
might decline to 60 bps for a client with
$10 million in assets.37
“One motivation driving the decision was
pricing. When we began thinking about
[starting our own firm], we thought that if
we were pitching some type of derivative
or collar it would be nice to be able to price
that on the street and to reach out into the
open-architecture world in which we live.
We were tired of losing business to banks
because of price.”
—John Krambeer, President and CEO
Camden Capital Management
The experience of John Krambeer and Camden
Capital Management may not be representative of the
experience of others and is not a guarantee of future
performance or success.
Pricing flexibility
Independent advisors, especially RIAs, enjoy
greater pricing flexibility within regulatory
guidelines. They are free to set their fee
schedule with clients. They can decide
whether or not to charge fees on cash. They
can charge hourly for planning. This flexibility
allows them to be more competitive and
manage their practices more effectively. It’s
been Schwab Advisor Services’ experience
that—using a $1 million client as a standard
for comparison—the typical asset-based fee
is 100 basis points (bps). Median prices
21
A Case for Starting or Joining a Registered Investment Advisory Firm
EXHIBIT 11: NET NEW ASSETS, 2008
(in billions of dollars)
$60
RIA Firms are Growing Faster
$60
45
$34
30
15
RIA Assets
with Schwab
Morgan
Stanley
0
Citi/Smith
Barney
-15
-30
Merrill
Lynch
-$14
-$26
Exhibit 11 compares net new asset flows for three of the major
wirehouses (prior to the announced joint venture between
Morgan Stanley and Smith Barney) to Schwab Advisor Services,
which outperformed the three combined in 2008.
Sources: Morgan Stanley, Citigroup Inc., Merrill Lynch & Co. and Charles Schwab
& Co. 2008 Quarterly Earnings. Also “Whole Lotta Love,” Christina Mucciolo,
Registered Rep., September 1, 2008.
In the six quarters from the start of 2007
through June 2008, the three largest RIA
custodians gathered $215 billion in net new
assets, compared to $168 billion brought in
by the top four brokerages.38 For many groups,
independence could be the ticket to growth:
The Golub Group, for example, launched with
$180 million and increased client assets by
more than 30 percent, to $240 million, in just
15 months. Three years after the launch, it
had surpassed $500 million in AUM.39
“It’s easier to grow as an RIA. You find
yourself in a different position in your
hometown by being the CEO of a wealth
management firm versus being a salesperson
in a major organization. Now I’m finding
myself on panels and corporate boards.
We’re not being viewed as a sponsor as much
anymore. Instead, I sit across the table from
clients and run a company just like they do.”
—Trevor Callan, CIMA, CEO
Callan Capital, LLC
The experience of Trevor Callan and Callan Capital, LLC
may not be representative of the experience of others
and is not a guarantee of future performance or success.
22
MOVING FORWARD
WITH INDEPENDENCE
Joining an RIA Firm
Once the decision is made to operate as an RIA, the next decision is how to do it. Joining
established RIAs is emerging as a common method for going independent.40 For example,
Convergent Wealth Advisors, LLC added two former wirehouse teams in 2008, each managing
more than $3 billion in assets at the time of the move. The teams report that they benefited
from the operating efficiencies and service culture inherent in their new firm’s model. (See
“Burns Wealth Management: Sharing Control of Your Destiny,” page 24.)
While starting a firm may require re-creating much of the infrastructure the advisor is used to,
joining an established RIA may provide a soft landing for advisors seeking a permanent new
home or for those wishing to experience the RIA model before fully engaging in starting their
own business. Affiliating with an existing firm may involve less risk and lower up-front costs,
but also offer less control.
It’s possible to find substantial support within some RIA firms. In fact, the choice of starting
a firm or joining an existing RIA often depends on the amount of support the advisor needs.
Some firms require that investment philosophies align. Most search for advisors who will fit
into the firm’s culture.
Service with experience
A service team in an existing RIA can augment the custodian’s conversion services when a
new advisor or team joins. If the existing firm has itself transitioned from the wirehouse or IBD
model or has previously added an advisor from one of those models, then multiple resources
will have first-hand experience with client transitions. By leveraging existing services, the new
advisor or team may be able to scale more efficiently and optimize client-facing service time,
not unlike the environment they are leaving.
“We have a sophisticated client base and needed an infrastructure tailored specifically for them.
By joining a firm like Convergent Wealth Advisors, the infrastructure was already in place, such
as manager research, technology and operations. This allowed us to remain focused on our
clients and their investment needs versus organizational and business management issues.”
—Lori Van Dusen, Managing Director, Convergent Wealth Advisors, Institutional Group
The experience of Lori Van Dusen and Convergent Wealth Advisors may not be representative of the experience of
others and is not a guarantee of future performance or success. Schwab does not recommend or endorse Convergent
Wealth Advisors or any other advisory firm for advisors considering joining an existing firm.
23
A Case for Starting or Joining a Registered Investment Advisory Firm
There are many options to consider if starting
a firm has been ruled out:
1.Join an RIA as an employee with the
possibility of buying into or earning
ownership in the future.
2.Merge practices, allowing for immediate
shared ownership.
3.A company that specializes in purchasing
RIAs or shares of practices can aid in the
lift out by offering practice management
and financial assistance.
4. An advisor/team can form a firm that
shares services such as technology and
legal/compliance with other firms in
return for a portion of the revenue stream,
while still building equity in their own
independent firm.
Some RIA custodians stand ready to not only
help advisors start a firm, but also facilitate
introductions to existing RIA firms.
Burns Wealth Management: Sharing Control of Your Destiny
After weighing the risks and rewards of independence, more and more advisors are choosing to
join RIA firms. Paul Hynes joined Burns Advisory Group in San Diego after spending 21 years with
a major wirehouse. He says that he made the transition, along with one associate, to allow himself
the freedom and flexibility to more easily serve clients’ best interests.
With assets under management of more than $100 million, Hynes reasonably could have decided to start his own
business. But the support available from like minded partners at Burns led him to join a firm instead. As he puts it,
“Alone, you’re an island. As a group, you can accomplish more.” He adds, “By joining an existing RIA firm, we’re not
all spending the same dollars to duplicate costly infrastructure and personnel.”
It took a team of people working on behalf of Hynes to manage his move to independence. A personal coach kept
him on schedule. A business consultant helped with financial models. With his partners, he purchased group Errors &
Omissions (E&O) insurance at a significant cost savings compared to individual coverage. He got business insurance
through a local agent and workers’ compensation through his payroll administrator. His banker provided access to capital.
Hynes was prepared to invest “whatever it took” to go out on his own. He also recognized that John Burns had already
invested time and money making many of the big decisions in creating what Hynes calls an “advisor service hub.” Having
the back-office support in place would allow Hynes to “hit the ground running,” which, in turn, meant he could spend
nearly 100 percent of his time serving clients. The partners at Burns Advisory Group, including John Burns in Oklahoma,
Tom McGuigan in Connecticut and Hynes in California, each have their own practice and share in the service expenses.
24
The experience of Paul Hynes, John Burns and Tom McGuigan and Burns Advisory Group may not be representative of the experience of others and
is not a guarantee of future performance or success. Schwab does not recommend or endorse Burns Advisory Group or any other advisory firm for
advisors considering joining an existing firm.
MOVING FORWARD WITH INDEPENDENCE
Start-Up Costs
To help advisors evaluate the financial
implications of going independent by starting
a firm, Schwab Advisor Services projected
the start-up costs involved for a firm with
$1,600,000 in client fees (RIA firm revenues),
two owners and two administrative staff.
See Exhibit 12, on page 26.
Healthcare, rent, supplies and insurance costs
are paid year in and year out, so not all the
costs shown are incremental costs. Many of the
marketing and professional services costs also
overlap with any given year’s profit and loss
statement. Depending on whether you choose to
lease or buy, there may or may not be significant
technology infrastructure and furniture-related
costs involved in opening your doors.
We estimated the key start-up costs by using
the Schwab Advisor Services Profit & Loss
Illustrator41 (for illustration purposes only).
Still other costs were estimated through
discussions with and requests for quotations
from third-party vendors. Exhibit 12, which
does not include any signing bonuses or
compensation for owners, professionals or
administrative staff, is based on the
following assumptions:
Health and other insurance benefits.
Outsourcing of human resources, payroll and
benefits administration through a Professional
Employment Organization allowing for
purchase of group medical, dental and vision
plans. The amount shown includes a set-up
fee, a monthly fee, and the first month’s
payment for medical, dental and vision, and
the annual set-up fee for a Schwab 401(k).
This is only an example and is not meant
to be a quotation for insurance.
Marketing. Includes creation of logo/
corporate identity, business cards, welcome
letter, folded business announcement and
four page website.
Office rent and maintenance. Leasing of
1,400 square feet at $22/sf. Includes a
two-month down payment.
Information technology and utilities.
Purchasing technology infrastructure-related
items such as computers, printers and
monitors, and outsourcing report reconciliation
through a hosted portfolio management
system such as Schwab PortfolioServicesTM
at 432 total accounts. (See page 10 for
more information on Schwab Performance
Technologies.) Utilities such as Internet,
Blackberries and phones (along with their
service plans).
Furniture purchases. “U-shaped” executivestyle desks, conference tables, articulating
keyboards and other office furnishings.
Compliance/legal professional services.
The amount shown typically will cover
professional third-party legal counsel
regarding, formation of the legal entity
(corporation, LLC, etc.) and SEC and/or
25
A Case for Starting or Joining a Registered Investment Advisory Firm
state registration, development of
compliance procedures, review of
employment contracts and client
agreement creation. In-person assistance
with audits is assumed to be factored
into ongoing overhead expenses.
Business insurance. Includes an estimate
of annual expenses for Errors & Omissions
(E&O) insurance and Property & Casualty
(P&C) insurance with aggregate limits of
$1,000,000 each. Many factors are used
to determine the rates charged for E&O
Insurance, including but not limited to a
firm’s mix of business and trading activity.
Exhibit 12: Sample RIA
Start-up Expenses
Health and other insurance benefits
$10,963
Marketing and business development
$14,000
Office rent and maintenance
$5,133
Information technology and utilities
$48,255
Furniture purchases
$27,146
Office expenses (supplies, copies, etc.)
$2,623
Compliance/legal professional services
$11,500
Business insurance
Total
$6,940
$126,560
For illustrative purposes only. Not all expenses are sunk or incremental to
Year 1 overhead expenses. A portion will be spent year in and year out.
26
Additional start-up cost options
From time to time, advisors with assets at
various levels decide to work from home in
order to manage expenses aggressively. Still
others choose to lease space in executive
office suites where furniture and basic
infrastructure is provided at an affordable,
agreed-upon price. Some new firms choose
to refrain from initially hiring administrative
staff, opting instead to outsource on an
as-needed basis.
Resources to Ease
The Transition
Advisors do not have to go it alone when starting or joining a firm. Whether an advisor
chooses to join an existing RIA or go totally independent and work with a custodian such as
Schwab Advisor Services, help is available. “Organizations like Schwab stand ready to make
the process uncomplicated. They’re available and more than willing to educate the broker,”
says Colin Higgins of the Golub Group LLC. “It’s really a simple process. If you want answers,
go to people who have gone through the process.”
The experience of Colin Higgins and the Golub Group, LLC may not be representative of the experience of others and is
not a guarantee of future performance or success.
Advisor Conversion Services
Advisors and their teams transitioning their clients’ accounts to Schwab Advisor Services
work closely with a dedicated team from Advisor Conversion Services (ACS)—a group solely
dedicated to handling transitions. ACS team members create custom transition timelines.
They often play a key role in the weeks that follow the advisors’ resignation from their
former firm. They offer and conduct face-to-face and virtual training to help advisors’
understand new software and/or new systems. Importantly, this is a full-time job for ACS
team members—they are not pulled from a service desk temporarily to work on a transition.
Schwab’s Advisor Conversion Services Team assisted more than 500 advisors in
transitioning more than 100,000 accounts and $50 billion in assets from January 2005
through December 2008.42 While Schwab Advisor Services has transitioned multiple teams
with more than $1 billion in assets, a typical team usually transitions $100 million in its first
12 months.
27
CONCLUSION
The financial advisory business has changed
dramatically over the past decade. Many
advisors who once were in step with their
firms now are considering alternatives. In
many ways, bank/brokerages have created
a foundation for independence. The shift to
teams and fee-based accounts at the major
wirehouses set the RIA movement in motion.
Investors are ready for change. For advisors,
independence can deliver that change.
Not only can independence offer more
control over the variables that determine
satisfaction among high-net-worth clients,
it can also provide the ability to keep a
greater share of revenues and build equity in
a growing business. Advisors contemplating
independence must carefully consider their
business goals and risk tolerance in the
context of their own practices. They must
also plan carefully for their transition.
Most advisors with whom Schwab has
spoken report being happy they went
independent. They attest that the freedom to
control their own business practices—from
how to serve clients to how to compensate
themselves—carries professional rewards
that extend far beyond the bottom line.
28
Your Next Step
If you are considering
independence and would like to
use a Profit & Loss Illustrator
to estimate start-up costs and
annual revenues and expenses,
call 877-314-7821.
About Schwab Advisor Services
Schwab Advisor Services is a leading provider
of custodial, operational and trading support
for independent investment advisory firms. As
of December 31, 2008, client assets
custodied with Schwab Advisor Services stood
at $477 billion. These assets, managed by
the approximately 5,700 independent
advisory firms Schwab Advisor Services
served, represented approximately 42% of
total client assets custodied with The Charles
Schwab Corporation (through its subsidiaries).
Brokerage products offered by Schwab Advisor
Services are not FDIC insured, are not
guaranteed deposits and are subject to
investment risk, including the possible loss of
principal invested. Schwab Advisor Services is
a business segment of The Charles Schwab
Corporation and includes the custody, trading
and support services of Charles Schwab and
Co., Inc., a registered broker-dealer and
member SIPC, as well as the portfolio
management and accounting solutions of
Schwab Performance Technologies (“SPT”).
CS&Co and SPT are separate subsidiaries of
The Charles Schwab Corporation.
Appendix
ENDNOTES
“Ready for a Rebound,” Ellen Uzelac,
Research Magazine, February 2009.
1
“The Trust Factor and High End
Customers,” Charles B. Wendel, Financial
Institutions Consulting, Inc., May 7, 2008.
2
From 2005 to 2008, 365 advisors or
teams of advisors started or joined firms
working with Schwab Advisor Services to
custody their client assets.
3
The Recently Independent Advisor Study was
conducted for Schwab Advisor Services by
independent research firm Koski Research
from September 16 through October 3, 2008.
Fifty-five advisors who recently started, or went
to work for, an independent RIA firm were
interviewed via telephone. Koski Research is
not affiliated with Charles Schwab & Co.
4
“Stability Enhances Loyalty,” Sarah Hansard,
Investment News, December 7, 2008. Also,
“Tumult Could Expand Ranks of RIAs,”
Financial Advisor (Frontline News), November
2008. Schwab Advisor Services fielded 2,000
inbound calls from interested advisors in Q1
of 2008, up 40 percent from the same period
in 2007. From Q3 to Q4 of 2008, online
inquiries increased 41 percent.
5
See the following for further perspective:
“Asset Gathering Machines,” Halah Touryalai,
Registered Rep., July 1, 2008.
6
“I’ve Got Your Back,” Anne Field, Registered
Rep., December 1, 2004.
7
“Merrill boosts bonus program,”
Darla Mercado, Investment News,
December 26, 2006.
8
“New Era of Retail Brokerage Begins,”
Dow Jones News Wire, November 21, 2008.
9
A FundFire Exchange conducted by
FundFire in January 2009 studying the
Morgan Stanley joint venture with Smith
Barney found that 83 percent of 66 quickpoll respondents believed the brokerage
consolidation trend will drive more advisors
to the independent channel.
10
“War Breaks Out for Wirehouse Brokers,” Gail
Liberman, Financial Advisor, November 2008.
11
“Tide Change for Traditional RetailBrokerage Firms Expected,” Investment News
Round Table: Wirehouse/Regional Brokerage
Firms, December 8, 2008.
12
“Breakaway UBS broker works long
hours, couldn’t be happier,” Jed Horowitz,
Investment News, February 8, 2009. The
article is based on a webcast hosted by
Schwab Advisor Services.
13
“Hybrid Heaven,” Halah Touryalai,
Registered Rep., November 1, 2008.
14
“Wall Street Squeezes Small Brokers,
Many Go Independent,” Christina Mucciolo,
Registered Rep., May 13, 2009.
15
Levels at which RIA custodians dedicate service
teams will vary from one custodian to another.
16
29
A Case for Starting or Joining a Registered Investment Advisory Firm
Example: If there were four respondents who
gave a score of 10, 7, 4 and 1, respectively,
each score would represent 25 percent of all
respondents. The 7 would be removed from
the calculation, leaving one Promoter (the 10)
and two Detractors (the 4 and 1). The Net
Promoter Score is the difference between the
two: 25 percent - 50 percent = - 25 percent.
17
The Cerulli Edge Advisor, Q3, 2007, and
Schwab Advisor Services Strategy Group. The
Cerulli report indicated Charles Schwab & Co.
was sixth. However, the creation of the joint
venture between Morgan Stanley and Smith
Barney moved Charles Schwab & Co. up to
fifth place.
18
“Breaking Gridlock?” Andrew Gluck,
Financial Advisor, February 2009.
19
“Payout” generally refers to a percentage of
commissions or asset-based fee revenue earned
by the wirehouse or independent broker-dealer
that it pays to its registered representative
whose clients’ accounts generated that revenue.
Since independent advisors are not
representatives of Schwab, they do not receive a
“payout.” Schwab Advisor Services may enter
into soft dollar arrangements and provide other
benefits to advisors who place their client assets
in custody at Schwab.
20
Custodians have the flexibility to charge
clients separately from the advisor fee and
to charge on a transaction basis.
21
“Whole Lotta Love,” Christina Mucciolo,
Registered Rep., September 1, 2008.
22
30
“Low-producers to exit wirehouses,” Dan
Jamieson, Investment News, February 9–13,
2009. Also based on On Wall Street
compensation guides.
23
“Taming an In-House Rivalry,” John Churchill,
Registered Rep., December 1, 2008.
24
“LPL to challenge custody biz,” Bruce Kelly,
Investment News, August 6, 2007.
25
“The Mating Game,” Christina Mucciolo,
Registered Rep., March 1, 2009. Also,
“Wachovia stops offering profit-formula
deals,” Dan Jamieson, Investment News, April
12, 2009.
26
This conclusion is based on findings of the
2006 Moss Adams Financial Performance Study
of Financial Advisory Practices. The study
involved 907 firms with 95 percent or more of
revenues coming from fee-based management.
In the $500,000 revenue practice, the average
overhead expense for independent brokerdealers was 11.51 percent higher than in the
RIA model. The $1,000,000 practice was 3.93
percent lower and the $3,000,000 practice
was 4.48 percent higher.
27
The Schwab Institutional (now known as
Schwab Advisor Services) 2007 RIA
Benchmarking Study examined firm performance
across 647 advisory firms that did business with
Schwab Advisor Services at the time. Asset and
revenue growth, sources of new clients, staffing,
pricing and financial performance were among
the topics covered. At the time of the study, the
647 firms managed a total of $256 billion for
more than 140,000 clients. Of these firms,
28
appendix: ENDnotes
370 had more than $100 million in assets
and 110 had more than $500 million in assets.
Participants included 380 wealth managers, 43
financial planners and 224 money managers.
Results shown are for the wealth manager peer
groups from the 2007 study. The top 20th
percentile (vs. the median) overhead expense
percentage is shown for each of the four
categories. So 20 percent of the firms in each
peer group came in at equal to or better than
(lower than) the overhead percentage shown.
Schwab Advisor Services Strategy Group
and “M&A Talks Hit Many Roadblocks,”
Financial Advisor (Frontline News),
September 2008.
29
Schwab Advisor Services Strategy
Group and “What is your practice worth? —
plenty if you’re fee-based,” John Churchill,
Registered Rep., August 25, 2008.
30
Owners’ Income + Profit is net of overhead
expenses, which includes support and
administrative staff plus non-staff expenses
associated with running a practice. Owners’ net
take-home pay is Owners’ Income + Profit less
expenses for non-owner professional salaries
and any profits reinvested in the business.
31
32
Schwab Advisor Services Strategy Group.
“Whole Lotta Love,” Christina Mucciolo,
Registered Rep., September 1, 2008.
33
Consult a tax advisor to explore the potential
pre-tax benefits of setting up an independent
business.
35
“Morgan Stanley Changes Pay Policies,”
Dan Jamieson, Investment News, December
3, 2007.
36
Schwab Institutional (now known as
Schwab Advisor Services) 2007 RIA
Benchmarking Study.
37
“The Five New Realities of Wirehouse
Advice,” Timothy D. Welsh and Patrick Butler,
Investment News, February 22, 2009.
38
The experience of The Golub Group, LLC may
not be representative of the experience of others
and is not a guarantee of future performance or
success. Your experience will vary.
39
Based on Schwab Advisor Services
internal Advisors Turning Independent results
reflecting an increase from 2006–2008 of
advisors joining firms.
40
The Schwab Advisor Services Profit & Loss
Illustrator uses the Schwab Advisor Services
2007 RIA Benchmarking Study (see footnote
28) as a foundation for its assumptions and
estimated costs.
41
Schwab Advisor Services Activity Metrics,
January 2005–December 2008.
42
“A Seller’s Market,” John Churchill,
Registered Rep., September 1, 2008.
34
31
This content is for general information purposes only and is
not intended to provide specific financial, accounting or legal
advice. You should consult your legal, tax and financial advisors
before making any financial decisions.
Experiences expressed by advisors may not be representative
of the experiences of other advisors and is not a guarantee of
future success. The mention of third party firms are not, and
should not be construed as a recommendation, endorsement
or sponsorship by Schwab. These firms are not affiliated with or
employed by Schwab.
©2009 Charles Schwab & Co., Inc. All rights reserved. Member
SIPC. Schwab Advisor Services (formerly Schwab Institutional)
is a business segment of The Charles Schwab Corporation.
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